Surveying the Crisis – How surveyors are undermining the planning system

How is it possible that despite the huge construction boom in London, the city is still failing to provide the housing it needs?

Much of this failure can be attributed to the way in which professionals have appeared to abuse their privileged role in the planning system to further the profits of their clients.

In this article I explain how the planning system is supposed to work and how the failure to regulate surveyors is threatening the sustainable development of our cities.

Planning and value

In 1947 the Government removed the unrestricted right of landowners to develop their land. Instead of being free to build whatever they wanted, whenever they wanted, landowners would have to apply for permission to build. Permission should only be granted if the proposed development met the development plan for the area.

Development plans are supposed to be drawn up based on need. The job of a planner is to try to discover what demand will exist for new buildings over the next 10 years and then draw up a plan to guide development.

In addition, plans are supposed to ensure a good quality built environment for the public. They include provision of open spaces, the protection of the historic environment and other requirements to ensure that cities develop in a sustainable manner.

Although this process is not explicitly about money, the distribution of wealth is central to it. Put simply, planning is how we re-distribute land value in our country. A change in designation in a plan from one land use to another (for example office to residential) can have large consequences for the value of land. Through the planning system landowners and developers are no longer free to pursue the most profitable scheme. Instead (if the planning system is working as it should) they are compelled to build the development of most value to the wider community.

The provision of affordable housing is the most explicit ways of how this redistribution works. In 1990s the then Conservative government introduced a requirement for new housing developments to include a proportion of affordable housing (this requirement is currently being dismantled by the present Conservative government). Clearly developers can make more money by not providing affordable housing, and instead selling everything at the market rate, but the need is for affordable housing. It is important that affordable housing is not loss making for developers, who receive a payment for building it. It is simply that the profit achievable is lower than with market housing.

The erosion of planning control

Despite having a planning system that should guide development towards the public benefit, In London we simply aren’t seeing the building needed. Between 2007 and today the amount of affordable housing delivered on new developments has gone from 12% to 3%. UNESCO is about to send a monitoring mission to London because of their concern that the lack of planning control is having on views of the Palace of Westminster. Instead we get more than a hundred towers, mostly of luxury housing that does very little to meet the needs of Londoners.

Clearly this was not the plan, but over the last ten years we have seen the steady erosion of the planning system by successive governments which has been largely centred around one policy: development viability testing.

What development viability testing does is say that if planning policies mean that a developer can’t meet a profit target, then the planning authority must remove planning controls in order to encourage development. In other words the need for the developer to achieve a certain profit level comes before social need. The effect is that the community provides a subsidy to developers out of their share of land value in order to allow a development to go forward.

The policy was first introduced by Ken Livingstone in London. Developers were challenging his affordable housing target of 50% as being unviable, and it was thought that the introduction of development viability testing would call their bluff.

However since then it has turned around entirely. The policy has been extended to the extent that almost any planning policy can be removed if it is shown that it makes a development ‘financially unviable’. And almost every development in London does claim to be financially unviable, a very strange phenomenon at a time when profits in the development industry are booming.

It is difficult to underestimate the impact of this policy change. Research from the Bureau of Investigative Journalism in 2013 found that across the country 60% of developments failed to meet affordable housing targets, representing thousands of lost homes.

The Games Begin

Development viability is a simple enough process. A developer employs a surveyor to estimate the costs of building and any future revenue that the developer will achieve. If the profit left over is not enough for the developer to finance his project then the scheme is deemed financially unviable and therefore eligible for planning subsidy.

And this is where the games begin. The entire system relies on the estimates made by surveyors, who are paid by the developer. What if to please his or her client, the surveyor deliberately underestimates the profit of a scheme in order to capture some of that lucrative subsidy for his client?

To compound the problem, as pointed out in my last post, it has become the practice of councils to conduct the whole viability process in secret so that there are almost no public scrutiny. If a surveyor were to deliberately manipulate figures to his client’s advantage, other than a council officer and any consultant they employ to assist them, no one would know until it was too late.

Worryingly, the evidence shows that this kind of practice does happen. At the Shell Centre surveyors for the developers, Knight Frank and Savills, simply created two contemporaneous estimates for the sales value of housing in the new development. When talking to the council, they insisted that the new housing was worth no more than £1275 a square foot. This would net the developer just over £1bn. They argued that when the costs of development were taken out there was not enough left over for the building to be financially viable. Lambeth and their consultant BNP Paribas accepted the general premise that the building was financially unviable, although they thought the valuation a bit low.

However, at the same time, Knight Frank and Savills were telling investors in the City that the expected values were in the region of £1640 a square foot. With the stroke of a pen, the surveyors had increased the value of the building by £323m. Of course, none of this was disclosed to the Council or the public.

[Edit: a reader noted that I had got the wrong link re: £1275 a square foot. This has now been corrected. The link for the £1640 figure goes to a review conducted by BNP Paribas on behalf of Lambeth Council, this looked at the figures that had been submitted by the developer and says that the figures were submitted on a block by block average with an overall average of £1275. The investors presentation cited an average of £1641 with a block by block average that was also higher than cited]

When this discrepancy was made public through a leak, the difference was simply explained away as a matter of timing. At the subsequent public inquiry and court battle into the scheme, we were told by Tim Corner QC, representing the developer, that the investor presentation was looking at future possible values of the housing.

It was impossible to determine the exact impact of these changes in valuations as the full viability assessment was never disclosed.

When the flats went on sale just a few months later that future possible value ended up looking very conservative. At the time of writing, sales values of currently available apartments at the Shell Centre development range between £1800 and £2000 per square foot. The highest value housing at the front of the development hasn’t even been put on sale yet.

Of course, predicting the future is not an accurate science, but in my opinion, it is simply impossible that the firms responsible believed that both estimates were fair and accurate. When one of those valuations is far lower than the other, and is produced for the specific purpose of gaining planning subsidy, the whole process stinks.

Apartments at the Shell Centre development as of 07/02/16

At another major scheme a short walk down the river, 8 Albert Embankment, Knight Frank played the same game, telling a planning inspector that their estimate of value was £60m less than what was being told to investors. That difference accounted for 30% of the value of that scheme. As a result the inspector accepted a large loss of both affordable housing and industrial space, although he turned down the development on other grounds.

At large schemes such as the Heygate and Earls Court, where vast amounts of affordable housing are being demolished to make way for new luxury apartments, campaigners have revealed suspiciously low valuations in the viability reports submitted with planning applications. However, until now it is only at Shell and 8 Albert Embankment where they have been caught red-handed double accounting.

Nevertheless the evidence suggests that the practice is widespread. In London it is rare to see a development that meets the affordable housing target, which suggests that most developments are telling planning authorities that their schemes are only marginally profitable. Back in the real world, developer profits are booming. It is difficult to imagine that the entire profession is wrong most of the time just by fluke.

In the public interest?

It is obvious that if a surveyor manipulates their valuations in order to allow their client to take value away from the community, then that is not in the public interest.

We may expect that someone paid by a developer to put the best gloss on their case, and when such huge amounts of money are involved there are bound to be instances of sharp practice. But in reality what is happening is clearly a corruption of the system.

One of the safeguards against this kind of behaviour is the fact that surveyors are professionals, regulated by a professional body. Like many other professions, they have a duty to both the public interest and their client.

Just as a lawyer’s duty to the court means that sometimes they must do things that appear to be against the wishes or interests of their clients, surveyors are not supposed to manipulate land valuations to the benefit of theirs. If they do they should face disciplinary action, and be banned from practising as a surveyor.

The public interest function of the profession is safeguarded by their professional body, the Royal Institute of Chartered Surveyors (RICS). RICS’s mandate comes from the Queen in the form of a royal charter. The point is that it is more than a trade body for its members, it has a wider duty the public.

The Royal Charter, which was first issued by Queen Victoria in 1881 and last updated in 2008, states that the role of RICS is:

“to maintain and promote the usefulness of the profession for the public advantage in the United Kingdom”.

The evidence suggests that the kind of manipulations seen at Shell and 8 Albert Embankment is happening on an industrial scale. It would unsurprising if firms are selling affordable housing avoidance schemes in the same way that accountants sell tax avoidance schemes. Indeed one firm, s106 management (which it must be said appears to be unregulated), is so crass as to publish a cartoon showing their clients walking off with a wheelbarrow full of cash after they had negotiated away affordable housing obligations for them.

So where has RICS been on this issue? The simple answer is nowhere. Given what we have learned about the practices of the industry, it is difficult to come to any other conclusion that until now RICS has comprehensively failed to uphold its duty to furthering the public interest.

Why? Who knows. These practices have been known about for some time in the industry. But consider this, surveying is big business, and Knight Frank and Savills are two of the biggest players in the industry. The turnover of Knight Frank was £440m in 2015 and Savills’ turnover was £1bn. When companies like this are involved in these kinds of practices then we know that the rot has reached the core and the remedy is difficult. I am not suggesting that these companies have undue influence on RICS, but as we have seen in the banking industry, regulators often find it difficult to tame the big beasts.

But the fundamental fact remains. As our system is currently set up we rely on surveyors taking their public interest obligation seriously, and for RICS to make sure they do. If they can’t do that then surely a new form of regulation, or a new way of doing planning, must be forthcoming, and soon.

Will RICS now take their cue from the increasing public anger over the housing crisis to do something to realign the profession with the public interest? A complaint about Knight Frank and Savills will be arriving at RICS on Monday, so we shall soon see how serious RICS are about their public interest mandate.

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An interesting article, but one I disagree with in some parts. The planning system identifies what planning policies the community wishes to see delivered and recognises that to do this it needs to be deliverable- hence the need for financial testing. Profit requirements are a combination of risk and reward. You emphasise the profits made by developers- rather ignoring the huge losses these companies made following the 2008 downturn. Analysis of development profits on completion of developments does not reflect the uncertainties at the inception stage and it is this that the funders will be considering. They don’t know how the development will perform over subsequent years and for this reason take a cautious view, based on current day information. In marketing these schemes property firms may make predictions, but that is all they are.

Viability assessments should be objective, by which I mean that they should reflect the development market as a whole rather than the specific applicant. This avoids protecting inefficient developers and is the approach required by funders. To be credible, I feel viability assessments should be prepared and reviewed by suitably competent individuals (Not necessarily Chartered Surveyors) acting independently and impartially from either the applicant or the planning authority. Market based information should not be confidential, but information provided specifically by the applicant that may have an impact on its business performance needs to be considered carefully. I fully agree with your concern on this point, but it is not always clear cut. I was a member of the audience at the GLA meeting you referred to and disagree with what you reported the RICS members as stating.

Prompted by what you say at the end I have now gone back and reviewed the transcript of the meeting. You are right in that perhaps I overstate it when I said they argued for keeping viability secret, the RICS members there did stress the importance of transparency but also said there were good reasons for confidentiality.

In my experience that approach has led to viability studies being released with huge redactions making them almost entirely meaningless. The testimony of Nick Perry at the meeting spoke to this, the local authority agreed transparency was important so they released to him the viability assessment on the Bishopsgate goodsyard, but redacted every number in it so that it was mostly just a set of blank pages!

Excellent. The issue of how to assess profit, what it comprises and how it is established is complex and rarely clear. There are a number of ways it can be shown- the Wyatt/ Crosby study for RICS titled ‘Financial Viability Appraisal in Planning Decisions: Theory and Practice’ raises some interesting points from an academic point.

In addition, how the profit target is set is a slightly different issue. This article deals with solely on whether the agreed target will be met, not what that target should be. I will however be dealing with that soon.

Peter Wyatt, my colleague at Reading University, and I have consistently argued that the technical approach to viability assessment has a major flaw in it which the planning inspectors and others have failed to adequately address. The system allows a developer to make a reasonable profit and the landowner to be “persuaded” to release the land for development. However, in many viability studies, this level of land value is based on the price the developer paid for the land or the prices other developers are paying for similar sites. This creates a situation whereby a developer can overbid the true value of the site and then claim that this overbid has made the site unviable if they are forced to pay the full planning obligations according to the policy. The RICS Guidance states that the land value is market value assuming policy compliant planning obligations so that is fine. All market value means is an exchange price; it is the assumptions applied to it that are the important bit. If the prices/market values are too high to afford policy obligations, by definition they are not policy compliant so do not constitute market valuation within the RICS Guidance. It is a classic circular argument. Pay too much and then argue that the price suggests it is the policy obligations that are too high because the price was right. Existing Use Value plus a bit doesn’t work either.

The above is a technical point but I think the more important point is about transparency. Having studied property valuation over 30 years, it is a much less precise process than most observers think it is and there is a significant literature about the quite legitimate variation between estimates of value from different sources. I therefore have a lot of sympathy with Charles Soloman’s opinion about a third party assessment if it could be built into the system. Rather than attack individual surveyors using odd titbits of evidence, I think a more useful campaign would be for the full disclosure of all viability studies which we could then investigate for impartiality. Transparency would give RICS a much stronger base for investigating complaints against its members.

I have never understood why “confidentiality” is defensible in circumstances such as these. If a developer or anybody else wants to reduce the planning obligations below the policy, it should not all happen behind closed doors. If they are not prepared to pay the full obligations surely it is the right of the comunity to see what the reasons are for this shortfall. We should be able to test their assumptions which include their assessment of the end value of the development, their estimates of costs and their assumptions as to a fair level of return. In addition all planning inspector decisions should include a full viability appraisal with all assumptions and inputs explicitly stated.

Perhaps then we could have a proper assessment of the application of the current policy and whether it is the technical application and/or the duplicity of surveyors which is causing the shortfalls in provison you mention; or is there something more fundamentally flawed with the whole policy approach.

The price paid approach should not happen if you look at other guidance than RICS but it does and that is very worrying. You are entirely right that it is completely circular. Get in touch and I have some information to share with you on this directly which may help your studies.

However, to be clear, my opinion is that the issue outlined in this post is systemic. Firstly, I have seen evidence of this happening from the same surveyor twice. Secondly it is known that some surveyors work on a form of commission where their payment is increased depending on how much affordable housing they can remove from the system. Thirdly, if you look at this from a macro level, viability assessments appear to be wrong all the time. I accept that there may be many reasons for this, but when I find evidence of this happening on more than one site it points to this being a factor.

I entirely agree with you however that transparency is key and the arguments for confidentiality are fallacious. The issue was outlined in my previous post.

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